FNCE30002 Lecture Notes - Lecture 7: Standard Deviation, Virgin Atlantic, Opportunity Cost
Document Summary
Real options analysis: real options analysis is the study of the value of managerial flexibility, use real options to analyse whether to invest in an asset or not. Incorporating flexibility into project, from real options, creates additional value (cid:1840)(cid:1842)=(cid:1842)(cid:4666)(cid:1866)(cid:1858)(cid:1864)(cid:1867)(cid:1875)(cid:1871)(cid:4667) (cid:1842)(cid:4666)(cid:1841)(cid:1873)(cid:1872)(cid:1858)(cid:1864)(cid:1867)(cid:1875)(cid:1871)(cid:4667: because the right has value attached to it not obliged to exercise the right. If npv < 0 would still purchase an option that entitles you to a right. Put option (cid:1842)(cid:1877)(cid:1867)(cid:1858)(cid:1858)=(cid:1839)(cid:1876)[0, (cid:1842) ] (cid:1842)(cid:1877)(cid:1867)(cid:1858)(cid:1858)=(cid:1839)(cid:1876)[0, (cid:1842): buyer takes long position right to buy, seller takes short position obligation to sell, buyer takes long position right to sell, seller takes short position obligation to buy. Option values are made up of two components: intrinsic value. Payoff from the option if it were to expire immediately (cid:1841)(cid:1868)(cid:1872)(cid:1867)(cid:1866) (cid:1864)(cid:1873)(cid:1857)=(cid:1866)(cid:1872)(cid:1870)(cid:1866)(cid:1871) (cid:1864)(cid:1873)(cid:1857)+(cid:1865)(cid:1857) (cid:1864)(cid:1873)(cid:1857: time value. Reflects the value that might be created over the remaining life of the option.
